Some of the best investments were initially unknown or seemed dubious -- and usually both. But they persisted and eventually led new markets that grew and became mainstream. The result? Life-changing returns for investors who got in early and never lost faith.
Archer Aviation (ACHR 1.00%) is an exciting company that could follow a similar path to disruptive and highly successful businesses. It's racing to develop and bring electric air travel to market. Yes, that makes the stock riskier than your run-of-the-mill blue chip stock. But there's no reward without taking risks. How likely is Archer Aviation to pay off as an investment?
Here is what you need to know about the stock's millionaire-making potential.
Archer Aviation and the big picture
You might already be familiar with electric drones. These small electric gadgets use electric motors to generate upward thrust to fly. You can go and buy one at virtually any hobby shop today. The idea behind electric air transport is similar but on a much bigger scale.
Archer Aviation aims to launch a small aircraft capable of carrying up to four passengers on short trips. The aircraft is targeting a 100-mile range on a single charge. This would be intended for dense population centers where traffic makes short trips difficult on the ground. Archer Aviation is currently targeting a commercial launch for 2025, hoping to hit the commercial market before competitors like Joby Aviation.
According to Morgan Stanley, the electric vertical take-off and landing (eVTOL) industry could quickly gain steam once it launches. Their research estimates the market at potentially $1.5 trillion by 2040. Archer Aviation has a market cap of just $1.5 billion today. Theoretically, a successful market launch and even the remote success of the broader industry could spell multibagger investment returns based on Archer Aviation's current value.
Does Archer Aviation have the cash to make it?
As Archer Aviation hasn't commercialized its product yet, the business is spending $316 million in trailing 12-month cash burn. That's going to research, testing, and a factory to build the aircraft, which management anticipates will be completed this year.
The good news is that the business hasn't taken on any debt, so all cash goes back into the business:
ACHR Cash and Short Term Investments (Quarterly) data by YCharts
On the other hand, Archer Aviation is continually issuing new stock to raise the funding it needs. Outstanding shares have risen by roughly 70 million over the past year. Adding new shares decreases the value of existing shares because they represent a smaller portion of equity in the business. Nobody knows how long it might take for Archer Aviation to begin making a profit, so investors buying the stock should probably expect new shares to dilute them for the foreseeable future.
Buying an idea
Usually, investors look at a stock and decide whether to buy it based on the underlying company's growth and profits. But Archer Aviation represents an idea more than a business today. The company is still nascent and unpredictable. There's virtually no revenue or profits to judge it on.
So where does that leave investors? Learn as much as you can about Archer Aviation's technology and products. If you believe that electric air travel will succeed as a practical way for people to travel around cities, a $1.5 billion company like Archer Aviation is a risky stock, but one that comes with plenty of potential upside to justify taking that risk.
If you do buy, consider dollar-cost averaging. The less proven a company is, the more volatile its stock will probably be. That means investors could be in for massive share price swings over the years.
Buy slowly so that you have a chance to be opportunistic.
